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In Depth

Energy
| 08/27/15

UN carbon trading hit by massive fraud

TCE

As Canada’s provinces debate the merits of carbon taxes versus carbon trading as the optimum policy to put a price on carbon pollution, the latter option is facing a public relations crisis with allegations that the United Nations’ carbon credit scheme has been hit by widespread fraud.

Organised criminal groups in Russia and Ukraine taking advantage of lax oversight and loopholes in one of the UN Framework Convention on Climate Change (UNFCCC)’s three carbon trading programmes mounted bogus carbon-saving projects that actually increased waste gas generation up to “unprecedented levels”, according to a study from the Stockholm Environmental Institute published in Nature Climate Change this week.

In total, according to the researchers, some four fifths of the carbon offset allowances issued under the Joint Implementation (JI) programme of UNFCCC lack environmental integrity. Most projects in the two eastern European states were not truly ‘additional’—climate policy jargon that means that a project prevented the emission of greenhouse gases that otherwise would have occurred. Instead, most of the emissions savings would have happened anyway.

Checking whether a project is indeed additional is necessary within carbon trading schemes in order to quantify how many tonnes of greenhouse gases would otherwise have been emitted. These ‘foregone’ tonnes are then assigned a carbon credit that can be traded with companies or other bodies that actually have emitted these gases, allowing them to claim that their emissions have now been offset.

Under the UN’s JI programme, assessment of additionality is performed by the country where a project takes place, with the host nation setting its own rules as to what counts as truly additional. In Russia and Ukraine, project approval was reportedly often delivered following kick-backs or bribes. This background of corruption added to an existing problem with the JI whereby projects abating waste gases with high global warming potential can often generate huge emissions reductions very cheaply.  The revenues from carbon credits are so substantial here that they actually create a perverse incentive for unscrupulous figures to boost production of waste gases.

In total, reckon the authors, the scam may have increased emissions by 600 million tonnes. To put this in context, many of these JI offset credits went on to be traded on European Union’s Emissions Trading Scheme (ETS) exchanges. The researchers believe that this resulted in a false EU abatement of 400 million tonnes of CO2, or roughly a third of the emissions reductions expected to be achieved by the ETS from 2013 to 2020. The bogus credits are worth some $2 billion, based on the current price for carbon in Europe.

The latest carbon trading scandal follows similar additionality problems from offset projects in China in 2010, and a string of tax fraud scandals in western Europe associated with the ETS in 2009. Critics of carbon trading say that the problem is inherent to such schemes because of the complicated regulatory framework governing a market in what is a fairly abstract commodity (see PICS’ short video). They point to carbon taxation as a superior way to price carbon because it is built on existing administrative taxation infrastructure, and due to the difficulty of gaming the system. America’s cap and trade legislation that ultimately was defeated in Congress came to 1,427 pages in length. Conversely, the legislation that established British Columbia’s carbon tax is just under 50 pages.

Nevertheless, three of the four main parties in Canada’s federal election favour carbon pricing, but they all back Ontario and Quebec’s carbon trading approach rather that BC’s carbon tax. Meanwhile, during the recent Alberta election, both the then Tory premier of the province, Jim Prentice, and his rival, now Premier Rachel Notley, distanced themselves from the eastern Canadian approach to pricing carbon. Alberta already has a modest carbon tax scheme, restricted to the energy industry rather than economy-wide, as in BC.

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